Are there no hiding spots for investors? With record volatility, a credit crisis and near certain recession, very few asset classes offer protection of investor capital.
Forget about earning significant returns, I want to know where I can put my money for safety of principal and a reasonable return for my effort. Treasuries, money markets, preferred stock are all reasonable alternatives, but offer minimal returns.
Treasuries may be safe today, but yields will certainly rise given the huge issuances forthcoming per the bailout and deficit spending. What about so called defensive stocks?
Even in this space, investors are faced with an alternative universe. That is to say, normally reliable and less volatile sectors are getting pummeled by investors across the board.
For example, the grocery space would seem to offer relative safety and potential for solid returns no matter the economic conditions. People need to shop for food, right?
Well they do, but they are doing so at a bare minimum. They are buying only the essentials, and they are searching for discounts in the form of coupons or lower list prices. That means the already tight profit margins in the grocery sector will be even smaller.
Investors are acting accordingly. One of my favorite grocery stocks, Supervalu Inc. (SVU), has seen its stock drop by more than half as a result of expectations for lower profits.
Those expectations are coming home to roost. On Tuesday, SVU announced earnings, and the news was not pretty.
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The company stated that profits fell by 14% in its second quarter that ended on September 6.
For the period, SVU made a profit of $0.60 per share after making $0.69 in the same quarter last year. Wall Street had expected a flat quarter thus the results are a fairly healthy miss by the company.
The main reason for the drop was an inability of the company to pass along higher prices to customers. Given the extremely competitive landscape for groceries SVU made the decision to make less money instead of possibly losing customers.
In addition higher fuel costs made shipping from its distribution centers more expensive. It was a perfect storm leading to negative news. Shares of SUV fell by more than $5 since the report was released.
To reflect a continuation of operating difficulty, SVU reduced its year end forecast to $2.90 to $3.00 versus a prior range of $3.04 to $3.20. Given that the credit crisis occurred after the end of the period for this report, it is entirely possible that even these numbers may be a bit light.
For years, grocery stores filled shelves with less-needed products. It was those products that helped keep profits growing. Now with belts tightening, these stores have no choice but to focus on the essentials.
Those essential translate to lower profits. There really is no place to hide. I would wait a few months before taking a position in SVU.
This dynamic will take months to sort out.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com and check out:
